The LMA has responded to the European Commission Consultation Document: An EU framework for simple, transparent and standardised (STS) securitisations.
12 May 2015The LMA continues to work with the CLO market participants to ensure an optimum functioning CLO market.
CLOs securitise the debt of sub-investment grade corporates, providing important liquidity to that part of the corporate market.
The EBA and BCBS/IOSCO have included a number of detailed criteria for identifying STS Securitisations. In addition a number of criteria have been put forward in the delegated acts of Directive 2009/138/EC (Solvency II). The criteria proposed and in some cases adopted thus far gives CLO market participants significant cause for concern.
The current proposals, if implemented as drafted, would exclude managed CLOs from being able to qualify as STS Securitisation largely on the basis that the portfolio of assets is actively managed. We do not share the view that a securitisation should be excluded on the basis that it is actively managed. This seems to be predicated on the belief that active management of a portfolio adds a layer of complexity to a securitisation which would make it ineligible for inclusion as an STS Securitisation. The LMA disagree with this conclusion for the reasons set out in the response to the European Commission Consultation Document: An EU framework for simple, transparent and standardised securitisation.
CLOs should not be disadvantaged in comparison to other securitisations because they are actively managed. The expertise of a CLO manager can add a great deal of value to a transaction through managing recoveries on credit impaired and defaulted credits. In fact CLO managers have consistently outperformed static loan indexes. Even through the credit crisis, default rates on European CLOs remained very low at just 0.1%, better or comparable to other securitisation vehicles.
Such “managed” CLOs provide banks, pension funds, insurance companies and other institutional investors with access to investment in the European corporate debt market but with robust portfolio quality requirements, structural protections and credit enhancement built in to the transaction to reduce risk.
Nicholas Voisey, Director LMA quotes.
'We remain very concerned that the labelling of certain securitisations as STS could materially and adversely affect the wider securitisation market creating implied 'quality stamps' for those that do meet the criteria and 'cliff effects' for those that don't'.
'CLOs are an important source of capital for corporate borrowers. The availability of capital to the corporate section is essential to promote sustained growth in Europe. The financing provided by CLOs helps corporates grow their business, employ more people thus contributing to growth. CLOs have performed exceptionally well throughout the credit crisis and to exclude CLOs from meeting the criteria would create even more hurdles to a well-functioning CLO market'.